Gas prices driven by market principles

In his recent complaint against oil companies, James Cook’s observations on the LIFO (last in, first out) and FIFO (first in, first out) methods for evaluating inventory and developing profit and loss statements are spot on. They are, however, irrelevant to the pricing process. Any retailer, whether selling gasoline, grapefruit, or galoshes, has to price the product with views both toward recovering his acquisition cost and being able to meet the replacement cost. If the replacement cost is higher (or reasonably anticipated to be higher) than the acquisition cost, then the price must rise if the profit level is not to shrink or even disappear.

If the retailer is not permitted this price adequacy, he cannot afford to replace inventory. That’s why government-imposed price controls invariably produce shortages. If the replacement cost is lower than the acquisition cost, the retailer still must set a price sufficient to recover his acquisition cost; if he doesn’t, he’ll suffer a loss. This reality explains why retail prices rise relatively quickly when inventory costs go up, but decline more slowly when these costs go down.

Mr. Cook is likewise accurate in noting that the many congressional and special commission inquiries over the years into “gas price gouging” have gone “nowhere.” He attributes this lack of arrival at criminality to “political influence.” Without denying that big oil effectively lobbies Congress (along with such other special interests as the National Education Association and the American Trial Lawyers Association), a simpler, more accurate explanation is that there was no wrongdoing to be found — only the everyday operation of ordinary market and pricing mechanisms.

Bob Foys

Inverness